WASHINGTON -- The Securities and Exchange Commission approved rules Thursday that set the stage for securitized small-business loans and other additions to the burgeoning asset-backed market.
Under the rules, banks will have more ways of selling off loans to improve their liquidity and capital positions. They can also retain the servicing rights on securitized loans, which allow them to maintain a relationship with the borrowers.
Banks can also serve as trustees for the instruments, holding issuers' assets for the benefit of investors.
"The rules should have a direct and quite immediate benefit to the capital markets in permitting greater flexibility with instruments that have proven their value to the financial markets," SEC Chairman Richard Breeden said.
Earlier Plan Broadened
Part of the SEC's initiative to stimulate investments, particularly in smaller businesses, the rules adopted Thursday are more liberal than an initial proposal in May, and broaden the range of loans than can be securitized.
Under the previous regulations, issuers of asset-backed securities had to file for costly exemptions from the SEC, and securities backed by general-purpose loans, for example, could not have been sold on public markets in the United States.
"This is good news for banks, in that these structured financings will be able to reach a broader segment of the market," said Sarah A. Miller of the American Bankers Association.
"To the extent that you're an investor and it's a more liquid market, it's better than having to hold on to loans for a requisite time period," Ms. Miller said.
A Portfolio Option
She added that asset-backed securities could be an attractive investment option for banks' own portfolios.
The rules are likely to boost the structured financing market, which totaled $300 billion last year. Structured financings in 1991 accounted for about half of all publicly offered securities in the United States. Most of that market consists of mortgage-backed securities, which were previously authorized by the SEC, along with pools of credit card and automobile loans.
"Probably the most far-reaching change in American finance in the last 20 years has been the evolution and development of the structured financing market," Mr. Breeden said.
One promising market for banks could be in securities backed by small-business loans, which were virtually impossible under prior SEC rules. Now, general-purpose loans to small businesses can be securitized in a manner similar to residential mortgages.
The new rules serve as a "means of allowing banks to develop greater liquidity for loans that they provide to small businesses across the country," Mr. Breeden said. "It is in fact the small-business sector that has been starved for credit in the last few years and where the bulk of the jobs occur."
Under the final rule, institutions can be exempt from the Investment Company Act of 1940 - mutual fund rules that hinder certain types of securitizations - if their securities are investment grade and meet several other conditions.
The commission also added language explicitly forbidding banks from both serving as a trustee of a given security and providing a credit enhancement in support of it. The SEC has been outspoken against these so-called tying arrangements, but until now it stayed away from regulating them, saying the responsibility lies with bank regulators.
"As much as we want to accommodate market evolution, we do not want to accommodate evolution in conflicts," Mr. Breeden said. "Tying is certainly one of the areas where we see serious abuse uncontrolled by other regulatory bodies in the marketplace today."
While the SEC unanimously approved the securitization rules, Commissioner Richard Roberts questioned whether they adequately delineate distinctions between investment companies and structured financing companies.
"The general provisions of the rule are riddled with exceptions," he said. "I would prefer a clearer line of demarcation."